The governance of utilities needs a fundamental re-think

There is currently considerable concern about the financial resilience of a number of UK water companies.

In several cases, companies appear to have taken on excessive levels of debt in an effort to square the circle of providing shareholders with attractive returns whilst still fulfilling public expectations for significant investment in the sector.

The apparent inability of private sector companies to balance such competing demands on a sustainable basis is leading to calls for either a stringent tightening in the regulatory framework or a return to public ownership.

In the Institute of Directors’ view, there exists a middle way between private and public ownership which could be achieved through changes to the sector’s corporate governance.

In its pre-election ‘manifesto’, published in 2019 and in the wake of the collapse of Carillion, the IoD made the case for the establishment of a newly-defined corporate form – the Public Service Corporation – through which the provision and outsourcing of public services and related activities could be delivered.

Like a private company, such a vehicle would have shareholders and operate on a commercial basis. However, its underlying legal framework would require a balance to be maintained between the interests and obligations relating to its various stakeholders, including its shareholders, employees, pensioners, creditors and customers. This duty would be embedded in the statutory legal duties of its board of directors.

Commenting on the proposal, Dr. Roger Barker, Director of Policy and Governance at the Institute of Directors, said:

“The boards of public utilities and other public service providers face an unenviable task. On the one hand, they are required by the Companies Act to prioritise the interests of their shareholders. However, this often conflicts with the understandable demand of the public to prioritise public services and infrastructure. Regulators find themselves attempting to arbitrate between these conflicting priorities, often with unsatisfactory results.

“The delivery of public goods and services through a new type of corporate form, the public service corporation, would provide directors with an explicit legal framework through which to reconcile competing demands over their decision-making. The directors of such companies would have a legal obligation to balance the interests of shareholders with those of other stakeholders. This would better reflect the business and political realities in which such companies are operating.

“There is no reason why public service corporations could not attract significant private sector investment. However, their directors would have a fiduciary duty to ensure that shareholder returns are not pursued at any cost. Although not an immediate solution to the current crisis at companies like Thames Water, such a re-defined governance framework could place public service providers on a more sustainable footing in the longer term.”